As the world of crypto continues to evolve, new asset classes are emerging, such as non-fungible tokens (NFTs). While only getting national attention in 2017 with the launch of CryptoPunks, NFTs have grown in popularity rapidly. In fact, according to Findweb3, there were more than 10.4 million NFT sales in 2022. Yet, as the popularity of NFTs grows, the US Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC) are raising concerns regarding NFT taxation and tax compliance. This is hardly surprising, given that traditional regulations and legislation are still catching up with the new realities of digital asset ownership.
Navigating The IRS Guidance On NFTs Tax Compliance
The lack of adequate taxation surrounding NFT trading is causing concern among both the IRS and SEC. NFTs are already recognized as property by the IRS for tax purposes, which means that capital gains tax may apply to the sale of an NFT. The SEC is concerned that some NFTs could be considered securities and hence be subject to securities laws and taxes. Because of this, the Internal Revenue Service of the United States is now thinking of considering non-fungible tokens on an equal footing with other collectibles like stamps, fine art, etc.
This proposed guideline is the first move taken by the United States tax authority to clarify the tax classification of digital assets, leaving many taxpayers unsure of their liability. The IRS and Treasury Department are currently collecting input on the tax characterization of NFTs as collectible under tax law, implying that they may face less favorable treatment under capital gains tax laws. Similar implications also apply to assets obtained through individual retirement accounts.
Non-fungible tokens (NFTs) are one-of-a-kind digital assets, including tweets, GIFs, and even non-digital assets like the right to attend a ticketed event or show ownership of a physical item. Yet, the taxation classification of NFTs might be ambiguous. According to Section 408(m) of the federal tax law, a collectible is any tangible personal property, such as works of art, antiques, gems, coins, and alcoholic drinks. The IRS intends to conduct a “look-through examination” to establish if an NFT’s linked right or asset is collectible as defined in the tax code. The IRS has asked for public comments on its proposed guidance on NFT taxation, which are due by June 19.
Conclusion
The IRS and SEC are keeping a close eye on the NFT market as it continues to expand in order to ensure proper tax compliance. Given the growing trend of NFTs, buyers and sellers must emphasize tax reporting and compliance to avoid any legal complications. Even though the taxation of NFTs is still a new and complicated area, taking proactive steps to stay on top of changes and keep accurate records will help reduce legal and financial risks in the long run.
